bermuda captive | 2010


35


Programme or that are ‘real estate owned’ by banks, but not officially on the market. Most of these properties will eventually hit the supply chain in the market, weighing in on non-distressed owners’ chances of home price appreciation for many years to come. What you are left with is a picture of the housing market that does not look poised to spring back to life immediately.


Employment As we are speaking about stabilisation, much has been made of the


stabilisation and small growth rate in job numbers in the first half of 2010. From our vantage point, we can concede that the worst is over and outright job losses have abated, but what we are left with is a structural unemployment and underemployment problem that is going to take many years to remedy.


By mid-summer, 32 months into the so-called ‘Great Recession’, we


will still see the overall narrow, or headline measure, of unemployment at higher than nine percent. As we write, unemployment has risen to 9.9 percent, and underemployment, defined as those who are unemployed, employed part-time for economic reasons but who would prefer to work full-time and discouraged workers, was at 17.1 percent. More than 6.7 million people (out of 13 million) have been out of work for six months or more, roughly 46 percent of the total pool of unemployed labour. The average (average!) duration of unemployment in the US is 33 weeks.


Lastly, hourly earnings are nominally positive, but are trending


lower and have been for more than two years, with the nominal pace of gains being exceeded by the Consumer Price Index. Real wages in America are falling, and while the tentative signs of renewed growth


Andrew Baron, CFA, is a senior portfolio manager at Butterfield Asset


Management, part of the Bank of n.T. Butterfield & Son Limited. He can be contacted at: andrew.baron@butterfieldgroup.com


in hiring is better news than broad-based firing, we are facing a long- term secular problem, rather than just a simple cyclical downturn. Coupled with the distress in housing, secular unemployment will


continue to keep consumer spending subdued for some time.


Conclusion Despite our admittedly downbeat view of near-term sustainable growth


in the US, we are not doomsday prognosticators. We do not believe the US economy is destined to, or even likely to, ‘double dip’ back into severe recession. Also, despite our commentary above relating to the structural problems in Europe that were thrown into sharp relief recently, we do not believe in the demise of the eurozone, or the common currency. What we would warn against is complacency.


Prior to the eurozone rescue package, markets were pricing in an aggressive


federal tightening cycle beginning at the tail end of 2009. Indeed, many of the US and international extraordinary liquidity support programmes designed to ease the banking crisis had almost (but not quite) disappeared entirely. In the space of three weeks, that has changed dramatically, and our view is that markets have consistently underestimated the lasting effect of the credit crisis and the recession that has followed. Headwinds to sustainable growth in the US remain, and the situation in Europe does not exist in isolation—it has simply created another impediment to rapid recovery.


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